United Won't Try To Buy Usair

Merger Wouldn't Meet Three Criteria

United Airlines, shying away from possibly igniting a merger frenzy in the airline industry, said Monday it will not attempt to acquire debt-laden USAir, the nation's fifth-largest airline.

United's decision ended weeks of speculation about whether it would seek to bid for Arlington, Va.-based USAir in an effort to increase markedly its size and expand significantly its presence on the East Coast, where most of USAir's routes are concentrated.

The decision was made by the board of directors of United's parent company, UAL Corp.

"Although our confidentiality agreement with USAir prevents us from disclosing the details of today's decision, I can say that based on our assessment, we did not believe a transaction that met our requirements was achievable," said Gerald Greenwald, chairman and chief executive officer of UAL and United.

"While our study confirmed a transaction would have significant revenue benefits from increased customer choice, we were disappointed we were unable to satisfy all of the criteria we set for a potential transaction," he added.

Throughout the six-week study that United undertook to determine the feasibility of a merger with USAir, Greenwald had maintained that such an acquisition would have to meet three criteria for United to undertake a buyout:

- It would have to substantially increase the value of UAL shares.

- It could not interfere with United's efforts to achieve an "investment grade" credit rating.

- It could not dilute the existing level of employee ownership at United.

Greenwald also had stipulated that a buyout had to be supported by a majority of United's pilots, ground crews and management employees, who together own 55 percent of the airline's parent firm.

The latter stipulation may, in fact, have been the obstacle that blocked a bid. A recent management survey of United employees showed that only about 6 percent of them favored a merger with USAir.

What concerned the employees most was USAir's history of financial troubles. Although the carrier has made money so far this year, it lost more than $3 billion in the previous five years, including $716 million last year. The refusal by USAir's employees to accept concessions to help support their airline also concerned United's employees.

In addition, United's pilots expressed concern about the issue of seniority and the difficulty of blending pilots from two carriers.

The decision by the Elk Grove Township-based carrier came as little surprise to those analysts who contended all along that the deal would have made little sense financially for United.

For one thing, they said, the price United would have had to pay for USAir would have been staggering--between $8 billion and $11 billion, including about $3 billion in debt.

In addition, the analysts contended, there would have been major upfront costs merging the carriers' operations.

Finally, there would have been difficulties bringing USAir employees into United's employee stock ownership plan, the analysts said.

"In short, it would have been a very expensive deal for United," said Michael Culver, a principal in First Equity, a Stamford, Conn.-based investment bank serving the aviation industry. "The money United would have had to spend to acquire USAir and integrate it into its system can be spent in a lot of other, better ways."

Still, United's decision to take a close look at USAir made sense from an operational standpoint, many analysts said. By merging with USAir, the nation's largest carrier would have placed itself far ahead of its chief U.S. rivals, American Airlines and Delta Air Lines, they said.

A buyout also would have made it possible for United to establish quickly an East Coast shuttle operation similar to the one it currently operates on the West Coast, the analysts said.

USAir, which earlier this year approached United about a possible merger, said it would now seek other solutions to its financial problems, including moving ahead on its plans to trim costs and eliminate unprofitable routes.

"Our talks with United, while important, were but one of several long-term strategic alternatives being examined" to make USAir consistently profitable, said Seth E. Schofield, USAir's chairman and chief executive officer.

Schofield added that if nothing else, United's decision to consider a merger with USAir sent a message to Wall Street and the rest of the airline industry that the "USAir franchise is sound and has significant value."

USAir earlier this year also approached American Airlines about a possible merger, but the Ft. Worth-based carrier, which has experienced its own share of financial woes in recent quarters, apparently gave the offer little more than cursory consideration.

Had United decided to bid for USAir, however, American, as well as other major U.S. carriers, would likely have been forced to make counteroffers to prevent United from obtaining an edge.

American's chairman and chief executive Robert Crandall said last week that he would have no choice but to bid for USAir if United did.